June 1, 2013: Vol. 25, Number 6

From the Current Issue

Today Randy is sitting on his deck looking beyond the lake at the melting snow-covered peaks of Colorado and contemplating change. He is contemplating arbitrage: The simultaneous purchase and sale of an asset in order to profit from a difference in the price. Market inefficiencies create arbitrage opportunities, which in turn ensure that prices do not deviate substantially from fair value for long periods of time.

As investors compete in an increasingly crowded global marketplace, attention is returning homeward where relatively low pricing and positive job growth look amazingly attractive on a global scale. While a few prime central business districts have garnered the lion’s share of new investments recently, 11 significant areas are emerging in the United States. They have been labeled mega-regions.

The National Council of Real Estate Investment Fiduciaries (NCREIF) was founded in the early 1980s by investment managers as a solution to investor demands for a benchmark to measure manager performance. The NCREIF Property Index (NPI), the first index the organization produced, led by the work of Frank Russell Co., began with fourth-quarter 1977 data and consisted of properties with no leverage. The NPI is an appraisal-based index and all properties in the index are domestic.

The swiftly expanding frontier of defined contribution plans, and its trillions of dollars in investable assets, has been pretty dispassionate about real estate. But a group spearheaded by some of the biggest names in institutional investing is determined to recast real estate as an object of affection among DC plan sponsors.

Fundraising activity dropped sharply during first quarter 2013 compared with the high volume posted during fourth quarter 2012. During the first three months of the year, 21 real estate funds announced final closings, with an aggregate equity haul of $7.6 billion, according to Institutional Real Estate FundTracker.

Institutional investing in the hotel sector is not exactly creating a bonfire. As NCREIF reported, hotel was “once again” the laggard in the NCREIF Property Index during the first quarter of this year, with a total return of 1.15 percent, including depreciation of –0.28 percent.

North America continued to show signs of a commercial property sales revival during first quarter 2013, as both the number of properties sold and total dollar volume rose sharply compared with first quarter 2012.

Today’s challenges to the sustainability of both our natural and social resources are different than they were 50 years ago. Global warming can make human life unsustainable, and the tensions of income inequality threaten the sustainability of the American democracy. But like generals fighting a new war with the weapons and strategies of the previous war, the natural resources and urban environmental movements have not yet adapted to these current threats.

Through the uncertainty of the Great Recession, the turbulence of the financial markets and the agony of a slow recovery, economists and investment managers waited out what they thought would be a predictable cycle for office real estate.

According to the 2013 Tax-Exempt Real Estate, the latest annual investor survey produced by Institutional Real Estate, Inc. and Kingsley Associates, at the beginning of this year, North American investors currently had more than $72 billion in uncalled capital commitments waiting in the wings. Combined with the $47 billion in new commitments investors hoped to place this year, that equates to roughly $119 billion in equity capital that is available to pump into the markets.

Investment managers pushed to get transactions closed and on the books during fourth quarter 2012, completing acquisitions totaling $12.1 billion during the quarter, according to Institutional Real Estate, Inc.’s Investment Manager Capital Flows Survey. The fourth quarter total was a substantial jump from the third quarter figure of $4.7 billion, and it was significantly higher than the fourth quarter 2011 mark of $7.7 billion.

At the start of my career in 1985, real estate was still somewhat of a regional business where capital was, in large part, guided by gut, instinct and familiarity. Things changed rapidly as banks followed the path of the insurers and solidified national lending platforms. The entry by tax-exempt investors into the real estate equity and debt markets was accompanied by the acceptance and elevation of the real estate academic within the industry.